How did the SBG and BetEasy acquisitions change the company's financial profile?

The acquisitions diversified revenue beyond poker into betting and casino and increased exposure to regulated markets in the UK and Australia. The filing states that the acquisitions added $591.1 million to 2018 revenue and $412.5 million to gross profit. They also brought substantial goodwill and intangible assets and increased total assets to $11.27 billion at year end from $5.42 billion.

Why was the 2018 net result a loss when Adjusted EBITDA was positive and higher than in 2017?

The filing attributes the net loss mainly to amortization of acquired intangibles, which is excluded from Adjusted EBITDA, along with a $147.0 million loss on debt extinguishment, $115.6 million of acquisition-related costs and deal contingent forwards, and $108.9 million of other costs. Depreciation and amortization totaled $282.8 million for the year.

What is the status of the material weaknesses in internal control?

Management identified two material weaknesses as of December 31, 2018: controls over the foreign currency translation of intercompany loans and controls over the valuation inputs for an embedded derivative. Management stated it expected to conclude these controls were effective as of the end of the first quarter of 2019, and Deloitte expressed an adverse opinion on ICFR as of year end.

What are the main legal and regulatory risks disclosed?

The most significant items are the Kentucky proceeding, now reversed by the Court of Appeals pending a possible Supreme Court appeal; an AMF investigation into trading around the 2014 acquisition announcement; a Quebec class action the company calls without merit; and an ongoing review of possible improper payments to foreign officials. The company also faces potential tax assessments, including a $24.2 million provision for a Canadian transfer pricing dispute.

How much debt does the company carry, and when does it mature?

Total long-term debt was $5.45 billion at December 31, 2018. The USD first lien term loan carried a carrying amount of $3.48 billion and the EUR first lien term loan $951.98 million, both maturing July 10, 2025. The 7.00% senior notes of $1.00 billion mature July 15, 2026. A $700 million revolving facility was undrawn at year end, though $74.2 million of letters of credit were outstanding.

FLUT 10-K FY2018 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 40-F filed March 6, 2019. Cited figures are marked; the original filing is the authoritative source.

The Stars Group Inc. (now Flutter Entertainment) filed this Form 40-F annual report for fiscal 2018 on March 6, 2019, which incorporates its Annual Information Form (Exhibit 99.1), audited IFRS financial statements (Exhibit 99.2) and MD&A (Exhibit 99.3).

The company is a global online and mobile gaming operator spanning poker, casino and betting, with PokerStars as its flagship brand. In 2018 it completed the Sky Betting & Gaming (SBG) acquisition in July and acquired a 62% interest in BetEasy in Australia, later raised to 80%. Consolidated revenue for 2018 was $2,029.2 million^a, up from $1,312.3 million in 2017, while net loss was $108.9 million compared with net earnings of $259.3 million the prior year.

Adjusted EBITDA was $780.9 million^b versus $600.3 million. The balance sheet grew sharply after the acquisitions. Total assets reached $11.27 billion, long-term debt was $5.45 billion, and goodwill and intangibles rose substantially.

The company financed the SBG deal with $4.567 billion^c of first lien term loans, $1.00 billion of 7.00% senior notes and $621.8 million of net equity proceeds from an offering at $38.00 per share. Management reported that internal control over financial reporting was not effective as of December 31, 2018, citing two material weaknesses, and that Deloitte issued an adverse opinion on ICFR. Key regulatory and legal exposures include the Kentucky proceeding, which the Kentucky Court of Appeals reversed on December 21, 2018, and an ongoing Quebec class action.

02—Key points

Key Highlights

Revenue rose 54.6% to $2,029.2 million for 2018, driven largely by the SBG and BetEasy acquisitions, which added $591.1 million of revenue.
Net loss of $108.9 million in 2018 compared with net earnings of $259.3 million in 2017, reflecting acquisition-related costs, $147.0 million of debt extinguishment losses and higher amortization.
Adjusted EBITDA reached $780.9 million (38.5% of revenue), up from $600.3 million in 2017.
Total long-term debt was $5.45 billion at year end, including $4.57 billion of first lien term loans and $1.00 billion of 7.00% senior notes due 2026.
Management and Deloitte concluded internal control over financial reporting was not effective at December 31, 2018, with two material weaknesses identified.
Revenue mix by line of operation for 2018 was Poker $892.6 million, Gaming $585.8 million, Betting $491.1 million and Other $59.7 million.
The Kentucky Court of Appeals reversed the $870 million judgment against the company on December 21, 2018, though the Commonwealth has sought Supreme Court review.

03—Questions

Frequently Asked Questions

How did the SBG and BetEasy acquisitions change the company's financial profile?
The acquisitions diversified revenue beyond poker into betting and casino and increased exposure to regulated markets in the UK and Australia. The filing states that the acquisitions added $591.1 million to 2018 revenue and $412.5 million to gross profit. They also brought substantial goodwill and intangible assets and increased total assets to $11.27 billion at year end from $5.42 billion.
Why was the 2018 net result a loss when Adjusted EBITDA was positive and higher than in 2017?
The filing attributes the net loss mainly to amortization of acquired intangibles, which is excluded from Adjusted EBITDA, along with a $147.0 million loss on debt extinguishment, $115.6 million of acquisition-related costs and deal contingent forwards, and $108.9 million of other costs. Depreciation and amortization totaled $282.8 million for the year.
What is the status of the material weaknesses in internal control?
Management identified two material weaknesses as of December 31, 2018: controls over the foreign currency translation of intercompany loans and controls over the valuation inputs for an embedded derivative. Management stated it expected to conclude these controls were effective as of the end of the first quarter of 2019, and Deloitte expressed an adverse opinion on ICFR as of year end.
What are the main legal and regulatory risks disclosed?
The most significant items are the Kentucky proceeding, now reversed by the Court of Appeals pending a possible Supreme Court appeal; an AMF investigation into trading around the 2014 acquisition announcement; a Quebec class action the company calls without merit; and an ongoing review of possible improper payments to foreign officials. The company also faces potential tax assessments, including a $24.2 million provision for a Canadian transfer pricing dispute.
How much debt does the company carry, and when does it mature?
Total long-term debt was $5.45 billion at December 31, 2018. The USD first lien term loan carried a carrying amount of $3.48 billion and the EUR first lien term loan $951.98 million, both maturing July 10, 2025. The 7.00% senior notes of $1.00 billion mature July 15, 2026. A $700 million revolving facility was undrawn at year end, though $74.2 million of letters of credit were outstanding.

04—Continue

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